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Jax Tax
Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1376
Experience:  JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
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We want to sell 4 1/2 acres of land in WI. (a second lot)

Resolved Question:

We want to sell 4 1/2 acres of land in WI. (a second lot) which is with our second residence. How is the best way to do this without incurring a tax liability.
Submitted: 3 years ago.
Category: Tax
Expert:  Jax Tax replied 3 years ago.

Jax Tax : Welcome to JA. I am here to assit you with your tax issue.
Customer:

Hello

Customer:

What other information do you need from us?

Jax Tax :

You state it is a "second lot" and your second residence. Is it two separate pieces of property or one.

Customer:

It is two seperate--we get two tax bills. They are entirely seperate

Jax Tax :

So there is a 4 1/2 acre plot of land with no buildings and there is a second property with a home. Are they attached to each other?

Customer:

yes the two parcels are right next to each other

Jax Tax :

In the past 5 years, have you used the property as your primary home, a rental, in business, or any other use?

Customer:

No, it's our vacation home--it has a mobile home and a garage on it

Jax Tax :

Are you selling both properties to the same person for one price or is it two separate deals?

Customer:

We are selling only the parcel with the land to a neighbor. As we live in Manitowoc in our principal residence, we still go up to this "home" to vacation in Northern WI.

Jax Tax :

How did you acquire the land? Was it purchased, inherited, gifted?

Customer:

We purchased both lots about 16 years ago. We put a well, home and garage on the one parcel. The other was just left alone and is a natural field.

Jax Tax :

What was the purchase price on the parcel that is being sold?

Customer:

We paid $2000 and the tax value of it is now FMV is $11,600 on our current tax bill. The price we were offered was $20,000 for this parcel

Jax Tax :

Is the person buying the property paying up front, or will he be paying you over time?

Customer:

They will be paying the enire amout with a check

Jax Tax :

Well you have a few options to minimize your tax. First, let me figure out what your plans are. Do you have any plans for the money?

Customer:

I am a homemaker and my husband is planning on retiring in less than a year. Probably use it for retirement and vacation. Maybe for pre-funeral arrangements etc. Nothing deffinate at this time. Would a quit claim be of sugnificance at this time as a tax saver?

Jax Tax :

How old are you? How old is he?

Customer:

I Will be 62 this Sept. and He will be 62 in December

Jax Tax :

What will be his source of income for 2011. w2 job, SSI, Pension? What do you think his gross earnings will be?

Jax Tax :

Last question, I promise

Customer:

It's W2 and I will probably be be on SS for two months (about $550 month) and he will gross between $45-50,000)

Jax Tax :

Ok. You have a couple options.

Customer:

Would delaying sale until he is retired be an option?

Jax Tax :

1. If you want to save for retirement, together you can contribute $12,000 to an IRA this year which can be used as an adjustment to income to offset the sale profit. The IRA would then grow tax free until withdrawal. This would be a great way to offset the current profit and save for retirement. You would both be old enough to withdrawal without penalty. I think that is a great option.

Jax Tax :

2. You could also do what is called a 1031 exchange. You would use the money to buy another piece of property. This would defer the gain until you sold that piece of property.

Jax Tax :

If you then transferred the new property at death, your heirs would get a increased basis and pay no tax.

Customer:

What if we don't want to either. What if we just sell it this year and take the cash without doing anything. What percent of the money would we be liable to pay taxes on that money after adjusting the FMV or deduction of the initial price of $2000? And would that money be added to his gross earning for this year?

Jax Tax :

The first option is the best. You offset the income and also get tax free growth until distribution. Double the benefit. You get to deffer the gain and it grows tax free. By differing the gain, you may avoid the tax as well. If you stagger the withdrawal from the IRA over a few years when he is only getting SSI, your total tax rate will be lower, and you may pay no tax depending on credits and deductions. At the least you have $19,000 in standard deductions and personal exemptions. SSI is not taxable if the only income is IRA withdrawals, so if you take it over a two year period, you would likely avoid the tax all together.

Jax Tax :

The capital gain tax rate for 2011 is 10% for your tax bracket. So a gain of $18,000 would create $1800 is tax.

Jax Tax :

Based on the prior use of the property and the sale conditions, the options above are the only ones available. The IRA is a great choice if you then withdrawal the money over a 2 year period once your husband is only receiving SSI. This would likely eliminate the tax.

Jax Tax :

Do you have a mortgage on your primary home?

Customer:

So you are saying that if we sell it and report it as income on our taxes we would only pay $1800 additionally in capital gains? No we have no mortgages on either homes.

Jax Tax :

Yes, the capital gain rate is 10% at your income level.

Jax Tax :

You will report it on Sch D as a long term capital gain. It is not ordinary income so it is not subject to ordinary tax rates.

Customer:

Okay, if we do sell that is what we will do. It seems the best option for us at this time--I want to go on a nice vacation!!!

Customer:

Thank you for all the information but we will still keep the other options in mind just in case.

Jax Tax :

Put $12K in an IRA, and use the remaining $8K to go on vacation. The other money is available at anytime without penalty because of your age.

Jax Tax :

I have to step away for a couple minutes. I will be back. If you are not here. Good luck. Please leave a comment if you accept my answer. If you have questions I will be right back and we can still communicate for up to 72 hrs after acceptance.

Customer:

We will keep all information and may do the IRA deal. Worst case we put out $1800 and that is information we needed to know. Thank you for your help. We feel you gave us very useful information. Good-bye

Jax Tax, Tax Attorney
Category: Tax
Satisfied Customers: 1376
Experience: JD, LL.M in Business and Taxation, IRS Enrolled Agent. Expert in Business and Tax Transactions
Jax Tax and 4 other Tax Specialists are ready to help you

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